Monday, February 20, 2017

Marginal Production In US Shale Will Set The Floor In Oil Prices -- Mike Filloon -- February 20, 2017

I was beginning to wonder "where" Mike was. Not to worry. Over at SeekingAlpha, an update on the Permian:
  • there is no doubt that newer well designs in the Permian continue to decrease breakevens, which should improve US production as OPEC production cuts are applied
  • although Permian production will continue to increase, at today's prices this production will not totally offset cuts
  • as Permian breakevens lower, the same could be said about other plays which could spur production higher in other states
  • as the marginal producer, US shale will not increase significantly as a whole, but the Permian should continue its upward momentum
I was hoping Mike Filloon would see the recent article by, and respond to it. I would have liked to have responded to that article, but I could be nowhere near as articulate as Mike. Mike pretty much says it all early in the article:
Play breakevens continue lower. Higher oil prices will spur oil production increases in the US. The Permian should realize the greatest increases. Some have said US unconventional oil is a Ponzi scheme. Those who surmise this rob Peter to pay Paul conspiracy, may not understand the complex realities of oil exploration and production.
It's a different type of investment. Oil production has high initial costs. Some operators pay high acreage prices to get into plays late. D&C costs can be high initially, but as with most businesses, costs decrease. LOEs are also key, as those costs are stripped from revenues from the well head.
This complicated industry has become more so through unconventional designs.
The Peak Oil theorists were wrong, as unconventional production was great enough to effect the world's supply and demand balance. It took time, and high oil prices, but US producers got the job done. It may have gotten the job done too well.
Conventional wells contrast horizontals with respect to production. Production begins and declines at a relatively low pace month over month. Horizontals produce an immense volume of resource in the first month, followed by a higher decline rate. While conventional production declines are easily calculated, it takes an engineering degree to estimate unconventional curves. The decline is not constant. Decline rates are exponential over several years then change. Initial horizontal production is created through induced fracs and the interconnected natural fracturing within the interval.
After 3 to 7 years, induced frac's stop producing, and we enter matrix production. Although a simplistic explanation, it is what many bears get wrong. Matrix production declines are much like a conventional well. Estimates vary at 3% to 5%. So if a horizontal is modeled to decline exponentially, and matrix production is not accounted for, one could model that well to zero in a shorter time.
There is another difference between conventional and unconventional production profiles, something that has not yet been addressed by many but will become more obvious in the out-years. This has to do with re-fracking unconventional wells and re-working unconventional / conventional wells.

Unconventional oil: "After 3 to 7 years, induced frac's stop producing, and we enter matrix production." When we enter matrix production, the jury is out whether a re-frack will change the production profile for all fracked wells. A re-frack will certainly change the production profile on a poorly fracked well, or a fracked well using "old" completion techniques.

Conventional oil: "re-working" a conventional well, will, at best, maintain the predicted production profile. 

Mike goes on to discuss EURs and models.

He also suggests that the upcoming "driving season" in the US could push WTI to $60/bbl. 

Maybe that will be the new 30-second soundbite for the Bakken: "$50-oil, 50 active rigs in the Bakken; $60-oil, 60 active rigs in the Bakken; $100-oil, 100 active rigs in the Bakken."

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